5 key trends shaping markets in 2022

1.   The end of easy money could be in sight

Despite strong and steady returns over the last few years, investors continue to predict further growth in the new year and beyond. Schroders’ 2021 Global Investor Study – an annual survey of more than 23,000 global investors – found that return expectations for the next five years have increased since our last survey in 2020. In Australia, investors said they now expected average returns to remain around 10.5% – high, but in line with actual performance over the past five years.

Yet there are also good reasons to temper this optimism with a note of caution. The first and most obvious area of concern is the interest rate environment. Central banks are already under pressure to tighten the incredibly easy monetary policy of the last few years – and that pressure seems almost certain to increase.

While it’s unlikely central banks will adopt policies that actively derail risk pricing, any movement in policy settings will directly influence the prices of everything from houses to equities. While this won’t be the end of the era in which central banks are effectively underwriting asset prices, it will reduce the support being given.

2.   No recession, but more volatility

Despite growing inflationary pressure on consumers and businesses unsettling investors and placing pressure on policy makers, overall economic conditions are likely to remain constructive in 2022 with the risk of recession low.  Nonetheless, it’s clear that the recent choppiness in some markets has left some investors nervous.

In fairness, those taking a cautious approach have been left relatively unrewarded over the past few years, while more aggressive and speculative portfolios have earned outsized returns. Now a more nuanced, value-driven approach could be more rewarding.

In 2022 markets are likely to deliver a bumpier ride than many investors are used to, making liquidity management, active asset allocation and astute portfolio repositioning increasingly important.

3.   Equity earnings growth looks set to continue, albeit more slowly

There’s no doubt that company valuations are still high – extreme in  some cases. Yet, as economies have opened up following vaccines and government stimulus, we’ve also seen a significant rebound in company earnings globally. Our profit model suggests this recovery will continue well into 2022. So, while that doesn’t mean current valuations are justified, it does suggest there is still some value to be found – especially since equities remain no more expensive than most other assets.

Certainly there are some extremely overvalued sectors, with a number of tech and healthcare stocks unlikely to ever earn enough to support current prices. Yet there are also high-quality sectors of the market that have been left behind, with ample potential to benefit further from the reopening of the economy.

Overall, our return projections for equities are moderate, in the mid-to-low single digits. That view underpins our overall risk positioning, keeping us on the defensive side of equity markets, while still providing room to take advantage of opportunities as they present themselves.

4.   Credit markets will reward a selective approach

In the current market, corporate credit doesn’t look particularly attractive.  Not only is there the risk of tightening interest rate cycles, but if equity markets fall, credit will also suffer as credit spreads widen. And if equities rally, there is now limited room for credit to benefit as spreads are already very narrow.

Nonetheless, a key feature of debt markets is their diversity. Debt markets offer an enormous range of opportunities, ranging from high-quality short-dated government bonds to higher-risk emerging market debt and sub-investment grade corporate bonds.

Our strategy is to use this diversity to find attractive debt investments where there is still good value and offering diversified sources of return. The risk of rising interest rates is only one aspect of a debt investment and this risk can be easily addressed through managing duration exposure in the portfolio. As a result, we believe the benefits of maintaining a well-diversified, carefully targeted exposure to debt investments will be an important component of a portfolio, even in the current interest rate environment.

5.   Sustainability will be the focus – in every sense

Already one of the hottest topics in investing, environmental, social, and governance (ESG) issues will continue to dominate investor conversations in 2022. As a multi-asset manager, we deal with multiple ESG considerations affecting each asset class. We will continue to think through those issues, understand them, factor them into our asset allocation decisions and then manage and report on them.

Importantly, the challenge for investors goes beyond simply incorporating climate risk into portfolios. We need to consider the full balance of externalities accruing through the investment decisions we make, ensuring we're capturing the right issues and heading in the right direction. Only then can we be sure we’re investing sustainably – in every sense of the word.